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Monday, November 14, 2011

“Letting the Banks Off Easy”

[See UPDATE to this article below. The judge in this case won't allow the settlement as the SEC and Citigroup won't provide sufficient information on the alleged fraud for the judge to determine if the settlement is fair and in the publics interest. Citigroup admits to no wrongdoing but again agrees not to do bad things in the future. If the SEC takes the banks to trial, discovery of the facts will give investors the evidence they need to file their own lawsuits, and just maybe the Justice Department might have to get busy investigating the big banks.]

The US Justice Department refuses to act on massive bank fraud in the lead up to our financial meltdown. The Security and Exchange Commission brings only puny civil cases as a token or our collective outrage.

Per an article in Propublica: In the run-up to the global financial collapse Citigroup marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations found evidence that the bank knew some of these products were low quality and, in some instances, had even bet they would fail.

The bank now says it has settled all of its potential liability to a key regulator – the Securities and Exchange Commission -- with a $285 million payment that covers a single transaction, Class V Funding III. In announcing a case, the SEC said it had identified one low-level employee, Brian Stoker, as responsible for the bank’s misconduct.

It made no mention of the dozens of similar collateralized debt obligations, or CDOs, Citi sold to investors before the crash.

California Refuses to Accept Obama’s Banking Sellout

There is no three-strikes law for crooked bankers, not even a law for a fifth strike, as The New York Times reported in the case of Citigroup, cited last month in a $1 billion fraud case. Unlike the California third-striker I once wrote about whom a district attorney wanted banished forever to state prison for stealing a piece of pizza from the plate of a person dining outdoors, Citigroup executives get off with a fine and by offering a promise not to do it again, and again and again.

As the Times reported when Citigroup agreed to settle SEC charges last month: “Citigroup’s main brokerage subsidiary, its predecessors or its parent company agreed to not violate the very same antifraud statue in July 2010. And in May 2006. Also as far back as March 2005 and April 2000.”

Not that the bankers face prison time, since the Justice Department has refused to act in these cases, and the Securities and Exchange Commission is bringing only civil charges, which the banks find quite tolerable. This time, the fine against Citigroup was $285 million, which may sound like a lot except that the bank raked off as much as $700 million on this particular toxic securities deal. As the Bloomberg news service editorialized, “... there should be only one answer from Jed S. Rakoff, the federal judge in New York assigned to weigh the merits of the agreement: You’ve got to be kidding.”

Not to pick on Citigroup, the too-big-to-fail bank that Clinton administration Treasury Secretary Robert Rubin helped make legal before he was paid off with a $126 million job on Wall Street; that corporation was not the only serial offender. “Citigroup has a lot of company in this regard on Wall Street,” the Times noted, “nearly all of the biggest financial companies—Goldman Sachs, Morgan Stanley, J.P. Morgan Chase and Bank of America among them—have settled fraud cases by promising that they would never again violate an antifraud law, only to have the SEC conclude they did it again a few years later.”

So forget relying on the federal government to hold the Wall Street swindlers accountable. Indeed, the Obama administration has been involved in negotiating a deal with state attorneys general to settle their complaints with the banks for a pittance of compensation for the victims. In return, the states would promise not to institute further legal proceedings against the banks.

The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.

As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency’s findings. Such settlements require approval by a federal judge.

While other judges are not obligated to follow Judge Rakoff’s opinion, the 15-page ruling could severely undermine the agency’s enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.

The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.

The agency in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.” [snip]

In his decision, Judge Rakoff called Citigroup “a recidivist,” or repeat offender, for having previously settled other fraud cases with the agency where it neither admitted nor denied the allegations but agreed never to violate the law in the future. [read more at The New York Times]